China’s economic growth rate is slowing and there are major challenges to resolve in the traditional state owned sectors with high levels of debt, overcapacity, low productivity and pollution issues. But there are also many positives as the world’s powerhouse economy continues its transition. While parts of the Chinese economy are speeding up, it’s not all about pace.

To understand the growth of China it is important to understand the objectives of China’s economic development; the policies to steer this transition, the progress already and the risks and opportunities for Australia-China investment.

We have just seen the release of KPMG’s China Outlook 2016. It makes interesting reading for Australia-China watchers in particular. The report characterises China’s transition from an investment and export-led growth model to one driven by consumption and innovation. This has led to the emergence of a two-track economy. Basic manufacturing and traditional industries – the slow-track – are experiencing significant headwinds. The second fast-track, services, advanced manufacturing and consumer markets are exhibiting strong growth potential.

In 2015, the Chinese Government introduced a number of major policy initiatives to facilitate the country’s economic transformation. They were designed to tackle overcapacity issues, increase productivity, promote innovation and entrepreneurship, and enhance the international competitiveness of China’s traditional industries. Rather than focusing on the speed of growth, these initiatives place importance on the quality of growth to achieve more balanced development conducive to long-term prosperity. This will continue to be a feature of China’s policies over the next few years, especially following the release of the 13th Five-Year Plan in March.

China Outlook 2016 captures some encouraging stories which auger well for Australia. Notably, recent economic data shows the contribution from consumption as a percentage of GDP in China is rising and that means potential opportunity. There is robust growth for services – offsetting the impact of the industrial slowdown.

Indeed, the focus must be on the sectors that Chinese companies will invest in overseas in the next three years – key information for Australia – as well as on sectors the Chinese government wants foreign investors to focus on in China.

Services, technology and advanced manufacturing sectors

E-commerce is one of these. Chinese consumers are reaching into their e-wallets following strengthening retail sales in 2015. It’s not overstating matters to say that e-commerce is the big standout in the Chinese economy. Online retail sales revenue totalled RMB 3.8 trillion in 2015 – an increase of 37 percent year-on-year and will double again by 2018. Australian exporters and importers need to understand this is the new superhighway for selling and distributing our consumer food and other products

For Chinese outbound investment, it’s all about the acquisition of technology, famous brands, healthcare services and financial services. Real estate also remains a dominant theme. Based on the report statistics, 82 percent of Chinese ODI now goes to developed countries like USA, Australia, Germany and 76 percent by private Chinese companies.

Like Australia, China is focusing on innovation as a means of transitioning into a high-value-added economy. With the ratification of the Free Trade Agreement (ChAFTA) between Australia and China, there is promising potential for the export of Australian goods and service, including know-how into China.

ChAFTA will boost trade and investment between China and Australia: lower tariffs will help Chinese exporters’ competitiveness as well as reduce costs for consumers in China purchasing imported products from Australia

It’s interesting that the services, technology and advanced manufacturing sectors, led by private companies, have taken over the lead role in driving growth. This will only continue with strong government support and rising entrepreneurship and innovation cultures.

However, China’s consumption contribution at 52 percent of GDP (vs USA at 68 percent) and urbanisation at 52 percent vs 80 percent for most developed countries shows there is a long way to go for growth in all sectors.

Continuing opportunity for Australia

Nevertheless, there will be ongoing opportunity for Australia. We are one of the top five destinations for China’s overseas investment in 2014 – the most recent data year captured. In addition, China became Australia’s seventh largest source of foreign investment in 2014 with its total investment stock here amounting to AUD 64.5 billion (about USD 58.2 billion) which was up 23.7 percent from 2013.

ChAFTA will stimulate trade flows between both countries and continue to prompt Chinese countries to invest in Australia. This, coupled with the continued rise of a strong consumer market in China, suggests positive opportunity for both our countries.

There are three positive drivers of Chinese ODI in 2016. Namely China’s advancement of a new paradigm of international cooperation (through its ‘Belt and Road’ initiative for example) the emergence of new funding sources, and the implementation of the recent free trade agreements with Australia and South Korea.